Would Policymakers Target Index Funds?

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A small but growing body of provocative literature has argued that when institutional investors own large shares of competing companies, it results in higher prices for consumers. This literature has profound implications for policymakers looking to promote competitive markets.

For example, Azar, Schmalz, and Tecu (2017) conclude that the government should restrict institutional investors from owning competing firms if the anticompetitive effects of common ownership are not outweighed by the efficiency-enhancing effects of diversification. Others have already suggested policy responses to concentrated ownership, most notably Posner, Morton, and Weyl (2017), who would restrict asset managers from owning more than one company in a competitive industry.